My brother and I were watching game 2 of the Columbus v Pittsburgh NHL playoff game last Friday night. The CBJ lost… bad. So around the end of the 2nd period he said something like, “Hey, you might have a suggestion about this…” Usually, it’s something work related or home improvement related, but this time it was about personal finance. I was humbled. It felt cool to get a money question from my brother. But… I didn’t know exactly how to answer it.
He told me his situation. He drives a Silverado, and his wife drives a Honda CRV. They paid off the CRV in November. The truck has been paid off for a while. Now he’s wondering what to do with the “extra” money. I’m sure this isn’t a question we ask ourselves very often. But we all strive to be there one day. My brother got there before a lot of us.
The Situation (not associated with Jersey Shore)
The Truck payment was $365. They paid an extra $135 per month to get the truck paid off quicker. Once the truck was paid off, they rolled the $500 into paying off the CRV. So they paid $840 per month towards the CRV. They paid the CRV off in November, so they’ve got $840 per month.
But wait, there’s more!!!!
He’s got an IRA from a previous job. He’s let it sit and grow without contributions. His wife has an IRA as well. She HAS been making contributions.
Now you’re up to speed. The question he asked me was, “Should I put the $840 toward paying down my house or put it in my IRA?”
His wife is pushing toward the IRA. He’s thinking house.
The logic of investing in the IRA is obvious. Investing in an IRA early in life (they’re 29 and 30) will give them a jump on retirement. We’ve all seen the math explaining what you need to invest to have one million dollars by age 65. It makes the case for you, doesn’t it?
My bro presented an argument different than what I have heard in the past. “If I pay off my house by the time I’m 40, I won’t need a bunch of money in retirement. I’ll be able to retire earlier.”
Hm. Interesting, right? It’s a frugal way to think about retirement. It got me thinking. I’ve always had this $1,000,000 number in my head for retirement. I’ve never even done the math to determine what I’ll actually need to survive. If I were going to do this calculation, I’d probably include a mortgage as one of my expected costs. Not him, he’s thinking outside the box.
The Principle and Interest (P&I) on his mortgage is $700. Paying an additional $840/month would be the equivalent of making 2.25 payments per month. 2.25 mortgage payments PER MONTH. They’ll have the house paid off in 8-10 years.
At the age of 40, using his strategy, they’ll have $1540 in monthly “extra” cash. They’ll still pay homeowner’s insurance and property taxes which I’ve excluded as over and above the $700 per month.
I haven’t talked to my brother about this advice yet. I bulked when we talked about it during the game. I heard him out on his strategy and his wife’s. But, I didn’t make a recommendation. I did tell him most financial experts would suggest his wife’s strategy: IRA. But I’m not most financial experts… I’m much more attractive… well, at least my wife is much more attractive than most financial experts’ wives. She looks like a fitness model. (There's a pic of her on my twitter https://twitter.com/jeffleonard12 ).
I’ve had 8 days to think it over. I have formulated a great plan for my brother and his future.
The Final Step
Once he’s paid down the house completely, he should max out his IRA and his wife’s IRA. They’ll be able to put $11K per year ($5500 each) into their respective IRAs. They’ll also have a solid base to put their kid(s) through college.
If you’ve made it this far, I appreciate you. Please leave your advice in the comments! We look forward to reading them.